Special bankruptcy court for big banks is on the table

Members of Senate banking panel are discussing provision for 'systemic' banks

By

RonaldD. Orol

WASHINGTON (MarketWatch) -- Key members of the Senate Banking Committee are in discussions to create a special bankruptcy court for "too-big-to-fail" banks, according to people familiar with discussions on the panel.

The court would work in tandem with a process to dismantle a Lehman-like failing super-sized bank in a way that doesn't cause collateral damage to the markets.

Lawmakers in the committee are working to see if they can create a broad bipartisan bank reform bill in response to the financial system's near collapse in 2008. Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., two Senate Banking Committee members have been charged with reaching a bipartisan deal on systemic risk issues.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., who announced last week that he plans to retire next January, is working with Sen. Richard Shelby, R-Ala., to create a bipartisan bill for the committee to consider later this month or in early February. Unlike efforts in the Senate, the House was unable to produce a bipartisan bank reform bill when it passed legislation with Democratic backing on Dec. 11.

In November, Dodd introduced a draft bank reform bill that would create a mechanism for the Federal Deposit Insurance Corp. to dismantle a failing systemic bank in a way that it does not result in the failure of other financial institutions and the expansion of a financial crisis.

The process would allow the FDIC to use taxpayer funds to make payouts to counterparties and creditors of the failing institution so that they don't fail as well. After that, the costs of those payouts would be recouped by fees charged to financial institutions with more than $10 billion in assets.

However, Corker and Warner are looking at creating a special bankruptcy court that could decide whether the institution should go through a traditional bankruptcy process or be subjected to the FDIC's dismantling approach, also known as a "resolution process," according to people familiar with the panel.

With this approach, if U.S. government bank regulators agree that a resolution process makes sense, they would need to file that decision to the court, which would make the final decision about whether it made sense to use the resolution process.

Warner communications director Kevin Hall said the panel and committee are "not discussing details," about discussions between the staffs of Warner and Corker. A Corker spokeswoman declined to comment.

Such an approach would also need to be worked out with the Senate Judiciary Committee, which has jurisdiction over bankruptcy code legislation. A senate Judiciary spokeswoman did not return calls.

Allowing failing banks more say

Public Citizen policy analyst Graham Steele said a newly formed special bankruptcy court could act as a gatekeeper to decide whether traditional bankruptcy or a resolution process would take place.

"With a straight resolution, bank regulators say to the failing firm that its time is past, however a bankruptcy court puts more discretion in the hands of the firm so that it has more of a say about its own fate," Steele said. "This seems like a way to take power away from bank regulators in this one respect and give the institutions more say about when their lifespan is over."

Steele said he and others at Public Citizen are weighing the pros and cons of such an approach and have yet to make a determination about whether they would support it.

Two people familiar with the discussions said the panel is basing their discussions, in part, on a section in a report released last year by a bipartisan Pew Institute task force for regulatory reform. Read the report.

The report calls for a new Federal Financial Institutions Bankruptcy Court that would have the sole jurisdiction to resolve failing super-sized banks.

The report also said the bankruptcy code should be amended so that bankruptcy can be the default process for managing failing mega-financial institutions, however it added that a resolution process should be set up for failing big banks to be used in "exceptional occasions when bankruptcy poses unacceptable systemic risk."

The bank reform legislation approved by the House does not include a provision to create a special bankruptcy court.

It also seeks to have large financial institutions with more than $50 billion in assets -- and hedge funds with $10 billion or more -- to pay fees to create a $150 billion fund that could be used to unwind a failing mega-bank. The Senate legislation does not envision the creation of a fund in advance, but would collect fees from financial institutions to recoup taxpayer expenses.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.